From Fees to Freedom: Richr’s Game-Changing Wealth Strategy in Real Estate, by Jason Rubin, and Glenn Orgin
Have you ever thought about why it costs 6% to…January 9, 2024
An in-depth analysis of the rules that determine the value of a house you can afford to purchase on your salary.
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Your salary is your maying means of calculating your buying power. While for smaller purchases you can determine quickly and easily what you can and what you can’t afford, determining the amount you can afford to pay on your new home may take a few more calculations. Part of the reason for this is that you will need to determine how much you are able to pay towards your home monthly. A good rule of thumb for this is known as the 28%/36% rule. This rule states that you should never purchase a home where your home-related costs per month will amount to more than 28% of your income. The second part of this rule state that no more than 36% of your income should go towards your debt per month. This should include the amount that you are paying towards your mortgage, credit cards, cars, and student loans. By following these two rules you will easily be able to determine what type of home you can comfortably afford to get based on your salary. To perform these calculations there are many mortgage calculators available online. Based on the information you provide them with they will give you the amount that you are able to afford based on your salary.
When trying to calculate how much you can afford for your home you should also consider the following key factors.
The amount that you will need to make to afford a $400,000 home will vary based on the loan term that you put in place for its repayment. Your initial down payment and interest rate could also lead to you getting ranging values for your required annual income. For all of the amounts used below it is assumed that the down payment will be 6% which is the average down payment in the USA.
The following are some examples of how much your annual income would need to be. The exact annual income would be determined based on your interest rate. For all of the
Assuming that you are going to make the average percentage that a regular American household will make for their down payment, which is 6%, and that you will choose a 30-year term, then you will need to have a monthly income that ranges from $72,000 to $82,000. For shorter-term repayment, you should expect that the monthly income you are earning should be at least 10 to 20 thousand more per year for every 5 years that you deduct from your term. To get more exact estimates based on your down payment and the interest rate you can use a mortgage calculator to determine the exact income you will need to earn annually.
Determining the amount that you can afford to pay on your house will widely range as different interest rates and monthly expenses could reduce the amount that you can afford to spend on your home. Normally with $80,000, you should be able to be looking at houses that are ranging in prices from $240,000 to $320,000. The fastest way of estimating how much house you can afford on your salary is to multiply your annual income by 3 and 4. The two numbers that you get should be the lower and the upper limit you can spend on a house. Obviously, this may not work for everyone as it is not a method that accounts for all of the other financial responsibilities that you have.
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To afford a $450,000 mortgage you will need to be making approximately $140,000 per year. However, choosing to get a mortgage without making a down payment could result in much higher interest rates than the ones you would have gotten with a down payment. For this reason, it may save you money in the long run, if you choose to save for a down payment before approaching lenders for a mortgage.
It would be hard to say who can afford a $500,000 house, as oftentimes different households have different financial obligations. In general, people with an annual salary between $150,000 and $160,000 should be able to afford a $500,000 house. However, in cases where a household has high debts or high expenses each month, then it may be that that amount annually is not enough to cover all of their expenses and a half-a-million-dollar house at the same time. This is why it is important to take into account your own specific situation before choosing the amount that you are able to spend on your home each month.
The definition of the middle class has definitely been changing in recent years. Currently, the median U.S. income is about $80,000 and according to the Pew Research Centre households earning between $52,000 and $175,000 each year would be considered middle class. As such, any household with $80,000 would under the current definition be considered middle class.
To determine whether you can afford a $650,000 home you will need to consider the following 4 factors.
Based on the current average for a down payment, and the current U.S. average interest rate on a 30-year fixed mortgage you would need to be earning $126,479 per year before taxes to be able to afford a $650,000 home. In this calculation, we have stuck with the 28% rule which wants your home expenses to not be any more than 28% of your pre-tax income.
2. Expenses and debts
While the calculation above can be accurate for some people, it will not be accurate for those who have not cleared off all of their other debts, or who have many running expenses each month. Paying off debts, paying insurance costs, utilities, child support payments or medical costs can all reduce the amount that you have available to spend on your mortgage. Therefore, this will also alter the income that you need.
Making a larger down payment will often result in both better terms for your loan and in you needing a lower-income each year to pay off your mortgage. Your down payment can truly alter the amount that you are able to pay on a house in the best possible way.
4. Interest Rates/ Credit Score
Your credit score and down payment will help your lender determine how much your interest rate will be. The lower the interest rate the lesser the income you will require annually will be. Therefore, trying to get the best possible rate could allow you to get a much larger home.
On a $90,000 salary, you should be able to afford a home that ranges from $270,000 to $360,000. The better your credit score the more likely you are to get favourable interest rates that will allow you to purchase a more expensive home. What’s more, you should always make sure that the home you are purchasing fits the 28%/36% rule. This means spending 28% of your salary on home expenses and maintaining a 36% debt-to-income ratio.
Using the basic 3-4 times your annual income rule, with a $120K income you should be able to purchase a home that ranges in value from $360,000 to $480,000. In general, your interest rate and the term that you choose for the repayment of your mortgage will greatly influence the type of property that you can afford. To best determine the house, you can actually afford based on your expenses and income you may want to use an online mortgage calculator. Many banks, lenders, and financial tools will offer online mortgage calculators for free.
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Whether you are able to purchase a home with $30,000 a year will greatly depend on where you live. In many of the more expensive cities, like Los Angeles or New York, buying a home for $30,000 may seem nearly impossible. In other cities and smaller towns, you may be able to get a mortgage with that amount. In any case, if your income is $30,000 a year you will want to ensure that you have an excellent credit score and a good down payment. Both of those will put your odds of purchasing a house up.
If you are earning $70,000 per year you should be able to purchase a home that is somewhere within the $300,000. The easiest way of knowing what home you can afford is to multiply your income by 3 and 4. The two values you get are the lowest and highest amount that you can afford to spend on your mortgage.
To determine the house, you can afford when making $40,000 a year you will want to follow the three rules listed below.
1. Multiply Your Annual Income by 3 or 4
By multiplying your income, you will be able to determine the lowest and highest amount that you can afford to spend on your mortgage. This can be a very good starting point when looking at potential properties.
2. The 28% Rule
You also want to make sure that your mortgage and general home costs each month are not more than 28% of your income. This will ensure that you are always able to make your payments on time.
3. The 36% Rule
Finally, your total debts, including your mortgage should never amount to more than 36% of your income. This is known as the debt-to-income ratio.
Determining the type of home that you can afford will greatly vary based on your income, the interest rate, and the debt-to-income ratio that you have. Having a good credit score and down payment can make all the difference when approaching a lender for your mortgage, so where possible you should always try to have those handled before looking to purchase your home.
If you’re looking to buy or sell a house and would like to discuss your option, Richr can help you!
Our fully licensed Concierge Team is here to answer questions and provide free, objective advice on how to get the best outcome with your sale or purchase.